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Semel rises to Yahoo challenge

CEO Terry Semel earns praise for strengthening the Web portal, but next year holds tough tasks such as satisfying Wall Street and maintaining the loyalty of Yahoo's audience.

SUNNYVALE, Calif.--You can look behind the beach volleyball courts, purple and gold sofas, and the free coffee stations that dot Yahoo's spacious campus here, but don't expect to find the same Web portal that Jerry Yang and David Filo took public six years ago.

That was "Yahoo 1.0," as some employees now call it, an era left in the dust of collapsing advertising revenues and a management shakeup that, a year ago Wednesday, saw ex-movie mogul Terry Semel take over as chief executive officer from Tim Koogle.

The anniversary of the switchover finds Yahoo well on the road to becoming a rougher-edged and more bottom-line focused Yahoo 2.0, according to analysts.

"It's far too soon to do a victory lap, but I think the company is well positioned today relative to where they were a year ago," said Jeff Fieler, an equity analyst at investment bank Bear Stearns.

Yahoo's turnaround efforts have thrown the company and its new CEO in the spotlight as an unfinished case study in dot-com comebacks. In his first year, Semel proved he still has the necessary hustle to run a tight ship after a 24-year stint at Warner Bros. But in his second year, the 59-year-old will need to prove that he's more than an ex-Hollywoodite fulfilling a midlife challenge.

Analysts give Semel ample credit for building a stronger, steadier foundation for Yahoo as it seeks to offset its heavy dependence on display advertising revenues with alternate businesses, such as classified job listings and premium services. But the transition has required a tricky balancing act to satisfy Wall Street with quarter-to-quarter revenue growth while maintaining the loyalty of an audience originally attracted by a site providing everything the Web can offer for free.

Stock price from May 2001 to present.  
Source: Prophet Finance
The company faces a tough road. Its stock price is down nearly 34 percent since Semel took command, closing Tuesday at $14.76 a share. The Nasdaq composite index declined nearly 24 percent in the same period.

The job has already tested many of the assumptions that animated the old Yahoo and left many of them in the dustbin. Semel swept out the old executive ranks to make room for seasoned traditional media veterans, whittled away nonperforming businesses, refocused Yahoo's business divisions to six units, reorganized the company's sales force and, perhaps most importantly, stemmed the company's falling revenues.

"Terry came in and immediately wanted to meet people and immediately refocus" the company's direction, said Jeffrey Weiner, former chief operating officer at Entertaindom, who joined Semel at Yahoo as vice president of corporate development last June.

Its self-imposed medicine has not always been administered with a sugar coating. In one abrupt change in March, Yahoo altered its policies for sending e-mail promotions to its registered users, forcing people to check a series of boxes to opt-out of receiving e-mail about new Yahoo products. Yahoo's new "marketing preferences" also automatically set people's settings that permitted marketers to send postal mail and make marketing calls to people at home.

These changes caused an uproar among many Yahoo members who were quick to condemn the switch. Adding fuel to the fire, many Yahoo users also fumed over a series of charges for services such as e-mail forwarding and extra photo storage. Such incidents have fed a perception that the new Yahoo is more interested in courting dollars than consumers.

"They are no longer reverent to 'the user is first,'" said Vik Mehta, a vice president at hedge fund Digital Century Technology Investors. "They just say, 'We will steal your eyeballs at any cost.'"

A whole new Yahoo
To be sure, some of these changes were under way well before Semel's arrival. But many stem directly from Yahoo's new strong-willed chief, according to people familiar with the company. Current and former employees said Semel has brought Yahoo a new harder-nosed attitude, managerial discipline and aura of cool detachment, in sharp contrast to the laidback anything-goes culture cultivated by Koogle.

Koogle's inability to say "no" to projects contributed to unmanageable corporate sprawl, according to one source close to Yahoo who spoke on the condition of anonymity.

"The manifestation of (Koogle's) inability to say no is how Yahoo ended up in every imaginable business and spread itself too thin," the source said. "He couldn't say no to anyone who came to him with the next idea for a property or service--even though Yahoo should have been run in a more focused way."

Vision Series
Guiding Yahoo from
adolescence to adulthood

Terry Semel's Vision Series profile

Under Semel, business unit heads have been forced to justify their respective divisions to a review committee--requirements that reverse Koogle's directives to simply grow the business as quickly as possible.

Yahoo's monstrous network of sites and services have been recategorized into six business units: listings, commerce, communications, media, access and enterprise. Semel laid off 400 employees, or 13 percent of Yahoo's work force, in several stagnant areas. He brought in a legion of gray-haired executives such as marketing chief John Costello, sales chief Wenda Harris Millard and longtime confidante Jim Moloshok, who would later be tapped to run Yahoo's media division.

Semel also set broad financial objectives that highlighted his desire to diversify from advertising. By 2004, he wants advertising revenue to comprise 50 percent of the company's total revenue, down from 75 percent in 2001. He also wants to develop billing relationships with at least 10 million of Yahoo's then-80 million registered users (Yahoo reported 98 million registered users in earlier this month), but offers no timeframe for that goal.

The CEO stands to gain substantial compensation if he succeeds in turning the company around. He was granted 10 million options when he was hired last May. Semel's salary for 2001 was $254,853, and Yahoo paid $127,766 in moving expenses for him. Semel, who didn't receive a bonus last year, owns 3,625,380 shares of Yahoo, less than 1 percent of the company's stock.

In March, he was awarded a bonus of an additional 1 million options for his performance. Among other things, the compensation committee pointed to his completion of several significant strategic alliances and relationships as well as success in hiring new employees.

Major deals completed on his watch include the $436 million acquisition of online job listing site HotJobs in February; a deal with paid search listings service Overture; and a partnership with SBC Communications in November to create a co-branded online access service.

Not for sale
As Semel has settled into his position, speculation that he had been hired to helped dress up the company for a sale has faded.

Despite continued assertions by Semel and executives within the company that Yahoo is not on the block, the Web portal came close to being acquired by French media conglomerate Vivendi Universal toward the end of last year, according to two sources close to Yahoo. Discussions between the companies were "hot and heavy," as one source described it, but fell apart for unspecified reasons.

A deal with Vivendi Universal would be unthinkable these days given the shareholder revolt against its CEO, Jean-Marie Messier. But the fact that Yahoo came close to shaking hands with a traditional media conglomerate raises questions about Semel's militant public stance against selling the company.

For now, Semel doesn't have a compelling reason to sell Yahoo. If his strategy for turning on multiple revenue streams works, Semel could sell Yahoo for a much greater premium than he could today.

A Yahoo representative declined to comment on "speculation." Semel was unavailable to comment.

Despite some progress, Yahoo isn't out of the woods. Financially speaking, the good news is that there isn't any bad news now that revenue is no longer declining. But advertising remains its largest chunk of revenue, and there aren't any indicators that companies are renewing their online marketing budgets.

Last quarter, the company posted a net loss of $53 million on revenue of $192.7 million. Although investors are not expecting profitability imminently, many were concerned with Yahoo's revenue, which would have been flat from last year if it weren't for a slight boost from its acquisition of

More cause for concern was Yahoo's marketing services business, largely comprised of its bread-and-butter advertising revenue stream. Revenue from that side of the business declined 15 percent from the same period in 2001 and 11 percent from the previous quarter, further proving that online advertising has yet to make a comeback.

In the last year, Semel appears to have won credibility as a leader. Now, it remains to be seen whether his policies will work.

"To have accountability, you have to have individual goals," said David Mandelbrot, vice president of Yahoo's entertainment division, who has been at Yahoo since 1998. "We didn't have that before."